Understanding the finer nuances of the share market may seem difficult. Yet, it is not as complex as you may think. All you need to do is invest some time and energy into learning more about the basic terminology and other concepts first. This will help you become a better investor.
Share Market Terminology Decoded
These are some of the terms worth knowing:
- Share: A share represents partial ownership in a company. Shareholders may receive dividends and benefit from capital appreciation and, in the event of liquidation, may have a claim to the company’s assets.
- Stock: Stock refers to ownership of a company’s shares. When you own stock in a company, you own one or more shares of that company.
- Bid and Ask: Bid is the payment offer made by buyers for stocks. Ask means what sellers will accept for the same. The spread is the difference between the bid and ask prices.
- Market and Limit Order: Limit orders have caps on the price that you wish to sell/buy at, while market orders purchase/sell at the current rates.
- Broker: This means an individual or company working as the intermediary between stock sellers and buyers.
- Volume: It indicates the number of shares that were traded in a certain duration. High volume typically indicates greater liquidity, while low volume can lead to price volatility.
- Bear and Bull Market: Bull markets indicate periods when stock markets witnessed a rise, with positive future sentiments among investors. Bear markets result from a fall in stock prices, with fears of more drops in the future.
- Dividend: Dividends are payments made to shareholders, usually from a company’s profits, and may be distributed as a fixed amount per share or based on a percentage of earnings.
- P/E Ratio: The P/E ratio is the ratio of a company’s current stock price to its earnings per share (EPS). A higher P/E ratio indicates that investors expect strong future performance.
- Earnings: Earnings indicate a company’s profitability, often shown as earnings per share (EPS), which represents the portion of the company’s earnings attributable to each share.
- Index: The index compiles stocks that represent a section of the economy/market and displays their performance. For instance, the 30 largest companies by market capitalisation on the BSE are clustered in the Sensex.
- ETF: These are exchange-traded funds that hold bonds, commodities, stocks, and other assets. They track sectors, themes, indexes, or strategies.
- Short Selling: Short selling involves borrowing shares and selling them with the expectation of buying them back at a lower price. It is risky because if prices rise, losses can be significant.
- Stop Loss: A stop-loss order automatically triggers the sale of a stock when it drops to a pre-set price. Once the stop price is reached, it converts into a market order.
Familiarising yourself with these key share market terms is the first step toward building a strong foundation for your investing journey. While the stock market may seem complex at first, understanding basic concepts like shares, P/E ratios, dividends, and market trends can empower you to make more informed decisions. The more you educate yourself on these essential terms and strategies, the better equipped you’ll be to navigate market fluctuations and seize investment opportunities with confidence.
